Monday, September 19, 2011

Danford book helps families


Dan Danford started Family Investment Center in 1998 to help families manage existing investments and grow financially independent. The firm currently serves over 150 key client families along with companies, retirement plans, and nonprofit groups. Family Investment Center is a commission-free Registered Investment Advisor stewarding almost $100 million. Danford was interviewed in his St. Joseph office.

Why write a book? Surely there are enough investment books in the marketplace.
True. But there’s a big story not generally told to consumers. I’m still astounded to encounter people who think of investing as a big game of chance. In truth, there’s solid science to investing, and I think it’s time for families to know about it. Instead, it’s often been limited to wealthy people and large foundations.

Why hasn’t this story been told to consumers before now?
It’s a function of the investment distribution system. Smaller investors – the typical family – buy investments through retail stockbrokers, insurance agents, banks, and fund salespeople. These channels focus on selling, and selling doesn’t allow much time for good consumer education.

Still, there’s no shortage of investment information.
Just look at the consumer press, though. I mean really look at the headlines and magazine covers. They simply mirror things that consumers already think. They’re selling buggy whips to horse owners. No one bothers to mention that Henry Ford created the automobile. Many financial salespeople do the exactly same thing.

Surely you’re not comparing yourselves to Henry Ford.
Of course not. We simply report the excellent work of others. Believe it or not, there’s a very large body of research about wealth management. Our book suggests over a dozen titles for further reading. Many, many, many people have contributed to the field and we’re not even part of that development. But I have taught investment classes in the business department at our university and I’ve spent nearly three decades managing money for wealthy people and groups.

Why Million Dollar Management? Many readers don’t have a million dollars.
And many financial professionals don’t manage a million dollars, either. That’s part of the point. Our sub-title is “Simple Lessons to Use Wealth Management Principles for Your Family Investments.” Many of these principles were originally discovered while studying and building large investment portfolios. But they work just fine with smaller accounts, too. That’s the first message of our book – families will enjoy more financial success if they manage resources in the same way as savvy millionaires.

What’s a good example of a difference between millionaires and the rest of us?
Dan Did you know that only one percent of millionaires trade stocks on a daily basis? Another one percent trade on a weekly basis. When Tom Stanley and William Danko wrote The Millionaire Next Door [1996, Longstreet Press] they found that fully 42 percent of interviewed millionaires hadn’t made a single trade in their portfolio during the prior year! Is that what you’d conclude after reading most personal finance magazines? I don’t think so.

Okay, you’ve made that point. Are there other messages in your book?
We think a lot about the morality of money. The notion that money is a responsibility and those of us blessed with having it should exercise sound judgment in its care and maintenance. We highlight some practical and religious family stewardship issues.

You’re beginning to sound like a prudent bank trust officer. How much has prior banking experience influenced your investment thinking?
A lot. I learned some terrific things during fifteen years as a trust officer. The best things we’ve carried over into Family Investment Center.

What’s something important that you learned?
For the typical investment professional, sales skills are critical for success. Brokers making huge money aren’t necessarily those knowing the most about investing or providing the highest return to clients. Instead, these are usually people with strong social skills and a powerful ability to persuade.

You sound as though this isn’t a good thing.
It isn’t necessarily a bad thing. But it can be a bad thing. Remember, this is a sales environment. These people are usually paid by sales commission. An ability to persuade can be a dangerous thing when coupled with high sales commissions.

So you dislike brokers. That’s what you learned?
That’s not right at all! There are some brokers I like a lot and some with very high ethical standards. But I intensely dislike any commission system. It places a salesperson’s need above the client’s. A few good people rise above this structure, but I can’t think of a single argument why sales commissions are good for the consumer. They were designed to help the company.

Yet, it is a salary system which has endured, even prospered, for decades.
Of course it is. These firms used to have a monopoly on market information. You had to use a broker to invest because there wasn’t any other choice. Charles Schwab and the Internet changed all that for the better.

How?
Now anyone wanting information can find it. The Internet combined with 24-hour news coverage has virtually eliminated any information advantage, so that reason for using a broker has diminished. And, thanks to Charles Schwab, you don’t have to use a high-priced intermediary anymore to place stock or bond trades. Today, full-service brokerage firms look like dinosaurs. Banks aren’t much better. I’ve got a glass jar in my office that is full of matchbooks from now-extinct local banks. Why do you think they’re merging like mad and trying so hard to enter other financial businesses? Consumers simply don’t understand competitive pressures taking place in the financial services industry.

If not traditional brokerage firms or banks, then what? What is the future for consumer investment services?
Well, I can’t be sure. We believe that “commission-free” investment services are a clear improvement. Commission-free professionals earn fees directly from clients and avoid commission-based investments. Working directly for the client frees them to make quality recommendations without real or perceived conflicts of interest.

That sounds much better. Why isn’t it the industry benchmark today?
It is growing quickly and some major firms are trying to transition to fees. One sad truth is that client fees are often less lucrative for the professional. Fees can be a great tool for both the client and professional, but you’ve got to have some volume to earn a living. Many brokers, insurance agents, bank investment officers, and fund salespeople can’t gather enough investment assets to survive. So, they stick with more rewarding commissioned products.

What about you? Your firm has used this fee-only model since inception. Does it work?
It works great. We are truly independent – not related to any bank, brokerage firm, or insurance company ¬ and revenues come directly from providing client service. We please clients or we die. Just like my grandfather’s grocery store back in the 1930s. Having said that, though, it hasn’t always been easy. Things change very slowly in the Midwest and we compete against some very talented traditional marketers. And, of course, over half of our existence has been during the worst bear markets ever. But, we’ve built enough volume to survive and we’re gaining a reputation that allowed us to grow during a pretty tough period. All things considered, it been a pretty good run. No complaints at all from me.

To purchase the book, click here.

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